Investors can find bargains in this market, which has seen the S&P 500 fall by 12% since the start of the year. You do need to exercise patience since no one knows when the economic effects of geopolitical tensions and high oil prices will dissipate.
When seeking a buying opportunity, you can look among high-flying growth stocks that have sold off. One such company is Amazon (AMZN 0.81%), whose stock is down by nearly 18% this year. But its long-term prospects remain bright. It's time to see why this has become my favorite growth stock.
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An online fixture
Its online retailing business retains a strong competitive position, offering customers the powerful combination of low prices and fast delivery.
Last year, higher costs for items like wages weighed on profitability. North American sales increased by 18.4% to $279.8 billion. But operating income dropped by 16% to $7.3 billion. It was a similar story at its International division, which saw a flip to a $924 million operating loss from a $717 million profit.
Management's first-quarter e-commerce guidance calls for 4.5% to 9.5% companywide sales growth after excluding foreign exchange effects. It expects operating income to fall to between $3 billion and $6 billion from $8.9 billion in the year-ago period. Certainly, investors didn't like slowing profitability and sent the stock down.
But I believe this will prove temporary, since it should reap the benefit from a recently announced price increase for its Prime membership. The annual fee will go up by $20 to $139. With more than 200 million members, subscribers certainly see the advantages of the shopping and streaming service. Since this is the first increase in four years and comes amid generally higher inflation, I don't think customers will push back and cancel their memberships.
And there are even more important reasons Amazon's prospects remain bright.
Lesser-known gems
When people think about Amazon, the first thing that probably comes to mind is online retailing. But Amazon Web Services (AWS), which supplies cloud computing, is a fast-growing, high-margin business that dominates the space with a leading 32% market share.
Last year, AWS sales grew by better than 37% to $62.2 billion. And its nearly 30% operating margin dwarfs the North American and International businesses' typical single-digit figures. AWS generated nearly three-quarters of Amazon's 2021 operating profit.
Size matters in this business due to the heavy financial commitment for data servers. So the market largely consists of AWS, Microsoft's (NASDAQ: MSFT) Azure, and Alphabet's (NASDAQ: GOOG) (NASDAQ: GOOGL) Google Cloud. With AWS' inherent advantages and high barriers to entry, fast growth looks like it's set to continue.
Then, there are Amazon's advertising sales, which have been growing by leaps and bounds. In the fourth quarter, they totaled $9.7 billion, up 32% from last year.
I'm not concerned that Amazon's high-flying growth days are behind it. In the fourth quarter, U.S. e-commerce sales grew by 9.4% compared to a year ago and accounted for roughly 13% of total retail sales. Some estimates call for 17% growth in online sales for 2022, and Amazon, with about a 40% share of that market, is in a good position to capitalize
It also has other ways to grow, like its highly profitable AWS segment and its platform's advertising sales. The company recently announced a 20-for-1 stock split -- meaning you won't have to shell out nearly $3,000 to purchase a single share. With the stock price down, this gives growth investors a good opportunity to pick up shares.
